A Systematic Review of Online Auctions for Fund Raising by Non-Profit Organizations

Background

Its origin dating back to Babylon in 500 BC auctions account as one of the oldest forms of price determination mechanism in the markets. Auction is negotiation protocols that entail simultaneous bidding with the price determined bidders and products or services allocated based on competition amongst potential buyers (McAfee, 2017).

Classifications of Auctions

There are four major classifications of auctions formats in the market based on the information asymmetry and the flow of prices. The auction types include English Auction, Dutch Auctions, sealed-bid first-price auctions, and Vickrey auctions (Klemperer, 2004).

English and Dutch auctions are both open auctions implying that they are orally implemented but entail distinguishing value setting features. According to Klemperer (2004), an English Auction also known as the oral ascending auction or first-price auction entails an ascending sequential price strategy where the auctioneer sets a reserve bid price which is the lowest price that the auctioneer is willing to accept while potential buyers place ascending competitive bids with a higher bid outbidding the previous bid until the bidders reach the maximum bid price, they are willing to pay for an item. As the bidding prices increasing, bidders gradually quit the auction such that the highest bidder after multi rounds of price iterations. Given that the bidders get instant feedback on the other bidder’s valuation of the item on sale, English auctions are associated with aggressive bidding (McAfee, 2017). The dominant strategy for a bidder is, therefore, bidding at a price slight lightly above the previous highest bid until the bidder reaches the private value price for the item. Generating its name from the Dutch Flower Auction, the Dutch auction entails an oral descending sequential price strategy. The auctioneer sets the highest price asking, while the potential buyers place descending price offers, with the price decreasing with subsequent bids till one of the bidders is willing to pay the quoted price. While it’s implemented in an open platform, a Dutch auction does not reveal fundamental information to enable bidders to make more informed decisions. Time-saving is the distinguishing advantage of a Dutch (Klemperer, 2004).

Both the sealed-bid first-price auctions and Vickrey auctions entail submission and opening of bids privately but with distinguishing features of the difference in the valuation that the highest bidder pays (Klemperer, 2004). In a first-price sealed-bid auction, each bidder independently submits a single bid, without knowledge of other bids value. The item is sold to the bidder providing the highest price; therefore is also popularly known as the first bid auction. McAfee (2017) notes that the confidentiality nature and the documented nature of the sealed option ensure accountability. Hence it’s popular among government entities and corporate organizations. The Vickrey auctions, also are known as second-price sealed-bid, involve the setting of bid prices without knowledge of the value of the other bidders. The highest bidder wins the bid, but the bid winner pays the price of the second-highest bid. According to Klemperer (2004), fundamentally, the bidder’s optimal strategy is determined by the bidder’s private value and the perceived valuations by other bidders, implying that the dominant strategy is bidding at the true valuation of the item. eBay, Google, and Bing are some of the popular types of Vickrey auctions McAfee (2017).

Surge Pricing and Congestion Pricing Mechanisms

Surge and congestion pricing are both a dynamic pricing model that employs a price discrimination mechanism to set optimum prices based on the forces of demand. Surge pricing entails a temporary increase in price above the regular price when the market is experiencing high demand. The rationale for surge pricing is the continued supply of a product or service when the market is experiencing unprecedented high demand. Lower willingness to pay the surge price results in a demand decline. This enables the scarce resources to be shared among customers willing to pay a premium for products when the market is experiencing a surge. On the other hand, a market surge implies higher compensation for the service or product provider, hence sustained product or service availability, reducing the extent of a supply shortage. Surge pricing is popular on-demand service platforms, particularly ride-hailing platforms such as Uber, Lyft among others. Uber, implements a surge pricing model as a strategy to ensure the reliability of services during the high demand periods such as during bad weather, strike in public transport systems, among others (Klemperer, 2004)(Cachon et al., 2015).

Congestion pricing is considered to be a dynamic pricing strategy that is structured to regulate demand by adapting the price to the changing market forces of demand. In the congestion pricing mechanism, price is an important signal for controlling fair allocation of resources with high demand resulting in high prices and low demand evoking low prices hence yielding optimal outcomes for both the seller and the buyers. Congestion pricing mechanism enables harnessing of the forces of demand on prices, yielding a reduction in resource wastage associated with congestion in traffic. The congestion pricing mechanism is also popular in the pricing rates in transport, electricity, and telecommunication. In the transport industry, underlying the congestion pricing mechanism is the increase of the cost of commuting during peak hours, which results in to shift of discretionary commuting for activities such as shopping to off-peak periods or other transportation modes with lesser traffic. The congestion pricing mechanism is being adopted in urban cities such as Stockholm, London, Gothenburg, Milan, Singapore, and even in towns such as Durham in England. Congestion pricing is not only a mechanism of reducing traffic during peak hours but also an avenue of raising toll revenues that are channeled to increase investment for increase capacity of the mass transit system, maintenance of roadways and reduction of highways taxes paid by motorists such as fuel taxes (Teodorovi? et al., 2006).

Online Auctions in E-Commerce

In today’s globalized economy, increasing internet access has revolutionized business mechanisms with customer-centric e-markets emerging as a fast-growing segment of the economy (Pinker et al., 2003). The customer-centric nature of e-markets favors online auction models as an appropriate pricing mechanism. By addressing temporal, spatial, and geographic constraints in the auction market, online auction enhances efficiency. The internet facilitates the opening of business to a wider pool of customers hence provides an ideal environment for trading. Pinker et al. (2003) note that online auction emerged in 1993, with firsts internet auction websites, eBay (www.ebay.com), and OnSale (www.onsale.com) being launched in 1995. Online auction markets are distinctly characterized by the number of buyers and sellers with standard auctions entailing a single seller selling to multiple buyers (and reverse auctions involving multiple sellers selling to a single buyer. The standard auctions such as the OnSale and eBay involve Consumer-to-consumer (C2C) auctions, Business-to-consumer (B2C) auctions while the reverse auctions such as Sorcity involve Business-to-consumer (B2C) auctions.

In e-commerce, eBay Auction is the prototype of an online auction platform whereby bidders submit a bid not less than the reserve price and the auction automatically awarded by the system to the highest bidder when the predetermined time limit ends (Hasker & Sickles, 2010). The e-bay platform applies the proxy-bidding concept whereby the bidders submit maximum bids with the proxy bidding system submitting a bid that is a minimum increment to the second-highest maximum (proxy) bid until it reaches the bidder’s maximum bid or other subsequent bidders outbids the bidders maximum bid. The price paid by the winning bid is minimum increment above the second-highest maximum (proxy) bid. The proxy bidding system applies a second price sealed bid auction, implying that the dominant strategy for the bidders is submitting a bid that is equivalent to maximum willingness to pay (Ockenfels & Roth, 2002).

Electronic Generic auction marketplace (e-game) is a classical deployment of intelligent agents in commerce that entails market simulations (Fasli et al., 2014). It’s a generic platform configured to support auction games, enhance efficiency, and optimize purchase and sales outcomes by web users and software agents simultaneously. The e-Game platforms support the different types of auctions by defining parameters such as price quote calculations, auction closure, intermediate clearing, and information revelation. Fasli et al. (2014) note that E-game platforms support the multi-attribute analysis that generates a weighted score based on the price, delivery convenience, and discreet values by other bidders generating an algorithm that is used to determine the bid winner.

The auction of the treasury bills (T-Bills) by the U.S. treasury accounts as one of the popular online auction models in the financial markets. The T-Bill auctions are open to the general public to submit either competitive and non-competitive bids with the non-competitive bids guaranteed too get securities at a price set by the competitive bids. Treasury. The bidders submit the tenders indicating the price and quantity of bills they intend to purchase, with the Treasury allocating the T-Bills, starting with those competitive bidders quoting the highest price, which sets the price offering for the non-competitive bidders.

Not-for-Profit Organizations Auctions: Advantages and Disadvantages

Charitable auctions have, over time, proven acceptable as a mechanism of leveraging our society’s consumption-oriented culture to raise revenue by non-profit organizations. Charity auctions are a common fundraising instrument for not-for-profit organizations that support charitable causes such as medical support, disaster response, education, food, among other social issues. Experiential items that are not available in the stores, such as celebrities meet-ups, naming rights for a character in the upcoming novel, autographed guitars, among others, sell best through auctions. Charity auctions have intrinsic gain and a private gain. The intrinsic gain is derived from donations that seek to create value for others by helping someone in need while the private gain is by obtaining the item won. The participating bidders generate utility based on the total amount of money raised during an auction (Kingston, 2015).

Well strategized and executed charity auctions aid in generating funds for non-profit organizations to support a good cause. The non-profit organizations save time and effort by holding a charity auction with the potential of raising substantial amounts as opposed to sourcing for individual donations. Moreover, the given that most charitable donations are tax-deductible, which maximizes the number of funds generated from an auction. As a highly engaging and flexible type of fundraising model, charity auction presents an opportunity for the fundraiser to share their benevolent vision to the donors. While undertaking the auction, the fundraiser has a platform to connect and the donor to bond, which enhances the donor’s confidence in the value for their money. The bond, therefore, enhances donor retention. Charitable auctions expand the donor portfolio, which then improves the value for the non-profit organization charitable activities. Holding traditional charity auction, which is held in a hall, creates a platform for inspiration for the audience with the financial capability to contribute (Kingston, 2015).

Charity auctions are not devoid of constraints. Since charity auctions are associated with exclusivity and high market-value items, they place high pressure on an organization’s procurement team to source items that meet high expectations. Charity auctions are associated with high logistical planning diminishing the economic viability of charity auctions. Silent charity auctions are time-consuming, risking generating value higher than the cost of implementing the auction. Moreover, the success of live charity auctions is highly dependent on the quality of the auction items and skills of the auctioneer, with auctioneers who trigger excitement and competition raising high value for items. Over time, auctions risk undermining the mission that the Non-Profit Organization is chartered to support. For example, auctions to support art would imply that the artwork retails at a higher price than the true market price, hence setting higher price precedence for the market, hence unsustainably retailing undermining the artwork market (Connelly & Winter, 2003).

Uncovering Value and Increasing Revenue through Auctions by the World Vision

Forbes Magazine enlists World Vision as #19 largest charity institution in the U.S. with a private donations valuation of $719 and with a fundraising efficiency pf 88 percent (Forbes Magazine, 2019). World Vision is 100 percent donor-dependent Christian relief and development umbrella organization. The Non-Profit-Organization supports humanitarian and advocacy activities by supporting communities, families, and children in fragile economic status in over 100 countries globally. The World Vision could leverage the opportunity of an online auction, particularly mobile auctions, to raise funds. Mobile auctions enable donors and guests to submit their bids via smartphones from the convenience of their seats. Mobile auctions open a charity auction to a wider audience, increase competition translating to revenue maximization by World Vision. Undertaking online auctions breaks the geographic barriers and would enable World Vision to extend its auctions to longer periods as opposed to a single night and venue auctions increasing the amount that the entity raises. The cost of facilitating online bidding is comparatively lower than the traditional live auction.

References

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